Alaska battles over how lifeblood oil is taxed

JUNEAU, Alaska — A high-stakes political battle is being waged in Alaska over whether to cut oil production taxes, an issue that could determine whether the trans-Alaska pipeline keeps pumping billions of dollars into the state’s coffers.

On one side are Gov. Sean Parnell, top House Republicans and the oil industry, who argue that the current tax structure is stifling investment and must be changed to boost oil production and avert a now-looming shutdown of the pipeline that carries at least 10 percent of the nation’s crude oil production, on average.

On the other side are House Democrats and leading senators, who say the Parnell administration hasn’t justified the need for tax cuts and credits that could cost up to $2 billion a year, and they question what — if anything — the state will get in return.

Companies have not committed to any new investments if the bill is passed but have said they see the proposal as a step toward making Alaska more hospitable to business.

Both sides are deeply entrenched, with the Legislature scheduled to adjourn in just over two weeks.

Parnell told The Associated Press on Thursday he has no plan to call a special session. If a bill fails to pass, he said he’ll view that as the Legislature consigning Alaska “to a future of declining oil production” and have no choice but to rein in spending on the capital budget — which traditionally includes projects for legislators’ districts — to try to conserve the state’s reserves.

The House voted 22-16 late Thursday to advance a tax-cut bill to the Senate, where leaders have expressed skepticism with Parnell’s plan. The Democratic minority leader asked that the vote be reconsidered, likely Friday, a move that could shift the vote tally.

There’s a lot at stake given state government’s heavy reliance on oil revenues to keep operating.

“There’s no certainty in what will happen under either set of conditions” — whether action is taken or not — said Scott Goldsmith, a professor of economics at the University of Alaska Anchorage’s Institute of Social and Economic Research.

“But I think the danger is, the longer we don’t act, the further out we get on sort of a limb,” he said. “And one of the challenges that we face is the viability of the pipeline.”

Production has been declining since 1989, when the 800-mile trans-Alaska pipeline hit its peak of moving 2.1 million barrels of oil a day. It is currently moving an average of about 640,000 barrels a day with a decline in throughput at the rate of 5 to 6 percent a year the past five years, the pipeline’s operator has said.

Tom Barrett, president of Alyeska Pipeline Service Co., told lawmakers in March that the line could require expensive upgrades or shut down if more oil doesn’t begin coursing through it soon. He said that should serve as a “wakeup call” that something must be done to spur production.

Virtually no one disagrees with the need to get more oil flowing; the disagreement stems from how best to do that.

The current tax structure, a legacy of former Gov. Sarah Palin known as Alaska’s Clear and Equitable Share, or ACES, features a 25 percent base tax rate and a progressive surcharge triggered when a company’s net profits hits $30 a barrel; it also boasts a suite of tax credits. The idea was the state would help companies on the front end but would also share with them in the good times, when oil is flowing and prices are high.

But critics, including Parnell and the oil industry, believe the surcharge is excessive and a disincentive to investment. Parnell said the only proof he needs to validate his position is the fact companies are investing more in other energy-rich areas, like North Dakota.

He has proposed giving new wells a break on the base tax, capping the surcharge and changing how it’s calculated. For example, different portions of the net profit would be taxed at increasing incremental levels. The analogy that gets used is that of an income tax bracket.

State Rep. Anna Fairclough, R-Eagle River, said the state must take a “bold step” like this to protect Alaska’s future. Billions of barrels of oil remain in Alaska’s North Slope but the administration has said that’s just a fraction of the total volume in the state.

“We have the rocks,” Fairclough said, but the trick is in ensuring the oil gets tapped.

She said there is greater risk of an economic disaster if the Legislature fails to act on this bill than if it does.

The problem is, even Parnell’s own Revenue Department cannot say for sure whether the current tax is helping or hurting industry, citing the state’s tinkering with the tax structure over the past few years. There also is a lag in the auditing of companies’ tax forms dating to 2006, when Alaska was under a different tax regime than it is today.

The state estimates it has spent more than $3 billion on tax credits for oil companies, but lawmakers have little idea whether the credits went toward drilling and exploring for new oil, as the state wants, or to basic upkeep of fields.

The number of oil and gas jobs grew from 10,100 in 2006, the year before ACES was passed, to 12,900 in 2009. But it’s not clear how many jobs were tied to new drilling or how many were for maintenance.

The number of service wells last year was the highest it’s been since 2005, and companies like Repsol recently announced plans to invest in the state — buoying claims the state’s tax structure is not a hindrance. But Pioneer Natural Resources has said that having a tax system in place that achieves a greater balance will be a major factor in whether his company expands its Ooogaruk site, and total production keeps declining.

Rep. Les Gara, D-Anchorage, predicted less money to hire teachers, firefighters and police officers, and more “for sale” signs in front of homes if Parnell’s bill passes. The Revenue Department estimates that changing the oil tax would generate about $800 million less in fiscal year 2017 — and that’s assuming a 20 percent increase in production over currently forecasted levels.

For critics, that’s unacceptable. But for those who support the change, it is seen as a righting of a system that’s currently out of whack.

The tax generated $6.8 billion in fiscal year 2008, a period marked by high oil prices and profits. It generated more than $3.1 billion the following fiscal year, when West Coast oil prices averaged about $68 a barrel, and just under $3 billion last year.

The administration believes the state can retain billions of dollars in reserves even under a worst-case scenario that sees no new investment in the foreseeable future, with some belt-tightening. Budget reserves are currently estimated at around $10 billion, at least.

During weeks of hearings on the issue, it was made clear the state needs Big Oil more than Big Oil needs Alaska. Goldsmith, the economics professor, said the industry isn’t above acting strategically to get taxes as low as possible. But he said the state needs to look at the realities: the opportunities that exist here versus in other areas, and what role tax policy might play in industry’s investment decisions.

He said there are North Slope prospects that have been discovered but haven’t been economic. There are also billions of barrels of heavy and viscous oil that is difficult and expensive to develop.

He believes the state needs to hit a tax range that has it sharing a bit more of the risk with the industry.

“In this deal, the future of the economy depends on the industry,” he said.

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